Not Marking to Market Will Hurt Fannie, Freddie

Arrogance and intellect criss-cross mightily in accounting. The people who understand accounting can't stand those who don't. And the people who understand accounting really well delight in saying things that they know the accounting-deficient types don't get.

That's what's going on with Fannie Mae (FNM - commentary - Cramer's Take) right now. The real debate in Fannie and Freddie Mac (FRE - commentary - Cramer's Take) has to do, as I see it, with "marked to market" accounting. When you have a financial company, you easily can overstate or understate earnings if you don't mark them to market. As someone who ran a hedge fund for 14 years, I can tell you that I could have made up pretty much anything I wanted to in terms of performance if I hadn't marked my portfolio to market. Many hedge funds don't. And the fallout is almost always a disaster. (Lancer, the hedge fund that Chris Byron keeps writing about in The New York Post didn't mark to market. Neither did Ken Lipper's convertible bond funds.)

I am an extremist about this stuff. I think that not marking to market is tantamount to committing financial fraud. I say that because I was a practitioner and I saw the abuses and they sickened me. Why are some sickened and others not? I don't know; as my late mother would have said, the liars were brought up badly.

Most of the time, the people who don't want you to know the truth about either how risky their assets are or how poorly they are doing are masters of obfuscating the debate, saying and doing things that go without challenge because of the arrogant and imperious way they put things. Journalists don't want to challenge; they've never taken accounting. Politicians don't want to challenge; they tend not to know squat about accounting either.

In fact, typically the only people who squawk are short-sellers, and they do that to journalists, who then get rapped for being tools of the shorts and have their work discredited.

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James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS by clicking here. While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to [e-mail]. Listen to Cramer's RealMoney Radio show on your computer; just click here. Click here to buy Cramer's latest book, "You Got Screwed!" Click here to order Cramer's autobiography, "Confessions of a Street Addict."